Is Scammed Money Tax Deductible? What the IRS Really Says

Getting scammed is one of those experiences you hope will never happen—and yet, it happens to millions of Americans every year. Maybe it’s a too-good-to-be-true investment, a phone call pretending to be the IRS, or an online “friend” who wasn’t who they said they were. However it unfolds, the result is the same: money gone, and a pit in your stomach.

It’s only natural to wonder whether the tax system can soften the blow. After all, we deduct all kinds of losses and expenses. So, is scammed money tax deductible? The answer isn’t always straightforward, but the IRS does spell out when (and when not) you can claim fraud-related losses on your return.

How the IRS defines theft and scam losses

For the IRS, not every financial loss counts as a deductible theft. To qualify, the loss must come from a situation where someone acted with criminal intent to take your money—fraud, deception, or outright theft—not just a deal that didn’t pan out.

Examples that may qualify as theft losses:

• Investment scams: Ponzi schemes or fraudulent “can’t-miss” opportunities.
• Financial fraud: A financial institution or advisor illegally siphoning funds.
• Extortion scams: Kidnapping or threats that force you to hand over money.

What usually doesn’t qualify:

• A legitimate investment that lost value.
• Overpaying for a product or service.
• Deals where poor judgment, not fraud, caused the loss.

To claim a theft loss, the IRS requires proof: police reports, correspondence, or financial records that show the crime, the intent, and the amount lost in a specific tax year.

Why most scam victims can’t deduct personal losses

Here’s the tough part: since the Tax Cuts and Jobs Act (TCJA) of 2017, most individuals can’t deduct scam-related losses on their federal return. The law tightened the rules on personal casualty and theft losses, limiting them to situations connected to a federally declared disaster.

That means if you lost money to a romance scam, a phishing scam, or even a kidnapping scam, the IRS won’t let you deduct those losses on your federal income tax return.

Note, however, that investment scams (including many ‘pig-butchering’ schemes) can be deductible theft losses if they involve criminal theft under state law and you have no reasonable prospect of recovery.

Why it matters:

• Without the deduction, your adjusted gross income (AGI) stays higher, which can affect your eligibility for certain tax credits and deductions.
• It also means scam victims have fewer options to offset taxable income, making careful tax planning even more important.
• While federal rules are strict, some state law may still allow partial deductions—worth checking with a tax professional familiar with your state tax codes.

When businesses and investors may qualify for deductions

While most individual taxpayers can’t deduct scam losses under current federal rules, the story can be different for businesses and investors. If the loss ties directly to a profit motive, you may still be able to claim it.

Where deductions may apply:

• Businesses: Fraud or embezzlement that affects daily operations can sometimes be written off as a business expense under ordinary tax law.
• Investment scams: Victims of Ponzi schemes can rely on IRS safe harbor rules (Rev. Proc. 2009-20) to simplify how they claim losses.
• Cryptocurrency scams: Losses from stolen crypto are especially complex—deductibility often depends on whether the platform failure counts as theft and whether recovery is possible.

Key limitation: The IRS only allows deductions when there’s no reasonable prospect of recovery—meaning you’ve exhausted realistic options like insurance claims, lawsuits, or restitution funds.

Special considerations across tax years

Scam losses don’t just sting in the moment—they can affect multiple tax years, depending on how and when recovery happens.

Key timing rules:

• Theft losses are generally claimed in the year you discover the loss, provided there is no reasonable prospect of recovery at that time.
• If you later receive repayment or restitution, the amount is generally taxed in the year received under the tax-benefit rule as ordinary income to the extent your prior deduction reduced tax (not capital gains).
• The IRS looks closely at whether there was a reasonable prospect of recovery—if so, you may not be able to deduct until recovery options are exhausted.

Why records matter:

• Keep all emails, texts, and bank records tied to the scam.
• Save documentation of legal filings, police reports, or insurance claims.
• Track recovery attempts year by year—this can make or break your case with the IRS.

Practical steps for scam victims

If you’ve been scammed, the first step is to protect yourself—and then get the right documentation in place. Here’s where to start:

• Report it: File complaints with the IRS, FTC, SEC (for investment scams), and local law enforcement. This creates a record that may help in recovery or future claims.
• Help loved ones: If a friend or family member has been targeted, assist them in documenting the scam and making official reports—they may be too shaken to do it alone.
• Evaluate tax options: While most personal casualty losses aren’t deductible, some investment schemes or business-related scams may qualify. Review the specifics before filing.
• Stay accurate: Focus on correct tax preparation—an incorrect claim could invite penalties on top of the loss you’ve already suffered.

Turning scam losses into smarter tax moves

Getting scammed is awful, but the story doesn’t have to end there. While most personal scam losses aren’t deductible, knowing the rules means you won’t waste time chasing tax breaks that don’t exist—and you can focus instead on strategies that do lower your bill, like credits, deductions, and smarter retirement planning.

At Bright!Tax, we keep expats and U.S. taxpayers informed on what really matters—so your money is protected where it can be, and your tax strategy works in your favor.

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